Investors looking at Goodman, Scentre results to steer decisions

Led by sector gorilla Goodman Group, the listed real estate investment trust (REIT) sector has outperformed the overall market so far this year, despite interest-rate uncertainties and valuation questions swirling around the office sector.

Just under way, the REIT profit reporting season will likely show whether the muted optimism is justified, or whether already-tempered valuations need to be trimmed further.

Artist impression of a data centre planned for Sydney.

So far this year, the ASX REIT sector has gained 15 per cent, compared with the broader market’s 4 per cent increase. However, the performance is skewed by Goodman’s 40 per cent share price surge, with the global industrial property giant accounting for about 40 per cent of the REIT index.

On Wednesday, reporting season early bird Centuria Industrial subdued the tone with a modest 1 per cent increase in funds from operations, to $109.3 million. Sustained by factors such as ecommerce and the growth of data centres, Centuria also reported a 0.1 per cent increase in the value of its 89 assets, to $3.83 billion.

Euree Asset Management’s Winston Sammut said many fund managers were waiting for Goodman’s August 15 results before deciding whether to invest in smaller, cheaper REITS.

“The money hasn’t quite made its way into the other stocks yet,” he said. “Fund managers are waiting for results to determine where to put their money.”

‘Fund managers are waiting for results to determine where to put their money.’

Euree Asset manager Winston Sammut

Goodman is also investing heavily in data centres and will update investors at results time. According to Macquarie’s research team, earnings guidance will likely reflect a wide divergence, with some names pointing to growth and others continuing to face headwinds.

Macquarie expects earnings per share growth of a slender 0.5 per cent in 2023-24, but rebounding to 8.5 per cent in the current year as interest rates flatten.

There is a big deviation, with alternative asset manager Qualitas expected to grow earnings by 44 per cent in the current year, while the more conventional Mirvac, Charter Hall and Growthpoint Properties are expected to shrink their profits by 2 to 5 per cent. UBS analysts believe valuations are “closer to the trough”, with transaction volumes and debt markets gradually improving.

Given the tougher conditions for residential developers and lower inflows and margins for the fund managers, UBS sees flat earnings growth in the current year (excluding Goodman) and 1.8 per cent growth in 2025-26.

“From here, we expect low to mid-single-digit earnings growth with limited new supply of assets supporting rents over the medium term,” the firm says.

At the same time, consumers remain resilient, which bodes well for shopping centre REITS such as Vicinity Group and Scentre Group.

In particular, investors will be laser-focused on the performance of the patchy office sector.

JLL Research reports national “net absorption” of 7700 square metres of office space in the June quarter, which means more new space was tenanted than vacated. But the trends varied, with 10,000 sq m of positive absorption in Sydney but a negative 26,600 sq m in Melbourne.

Office rents in the Melbourne CBD rose 4.6 per cent in the year to July.Credit:

The Sydney figure also masks a big variation between well-performing prime space and secondary digs. While national vacancies stood at 15.4 per cent, the Melbourne number swelled to 19.6 per cent – the highest since 1995.

Still, fewer tenants are seeking to hive off their excess space. CBRE reports that office sub-leasing volumes fell by 38 per cent in Sydney and 11.8 per cent in Melbourne in the June half. As at the end of June, there were 49 national sublease listings of more than 1000 sq m, compared with 65 in December 2023.

However, Macquarie still forecasts further devaluations of 22 per cent for offices – its least preferred sector – compared with a 4 to 5 per cent decline for retail and industrial.

Meanwhile, JLL reports a surge in transaction activity, which will further provide proof about whether current valuations are justified.

There were $11.5 billion of deals across the office, industrial and retail sectors in the June half, with $7.1 billion transacted in the June quarter. In the June 2023 half, $8.3 billion of properties changed hands.

Offshore investors are reappearing, with $2.8 billion of purchases in the June half, compared with $3.2 billion for the whole of 2023. The sellers predominantly were REITS, notably Mirvac and Dexus.

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